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Global

Global: Trends in Non-Compete Provisions

By - - Employment Law, Restrictive covenants

Governments in some areas of the world are increasingly limiting the use of contractual non-compete clauses, with some countries already imposing strict restrictions or near-total bans.

Canada is now proposing reforms that would further limit these clauses and introduce broader powers to regulate other employment-related restrictions. This reflects a wider global shift towards tighter scrutiny and conditional enforceability, with employers increasingly turning to alternative forms of protection.

The Canadian Position

The Canadian Parliament is considering amendments to the Labour Code that would further limit the use of non-compete restrictions in employment contracts. This is part of a trend that is now well established in developed countries.

The Canadian proposal focusses on “non-compete” clauses and “other employment related restrictions”. 

A non-compete seeks to stop a former employee in effect from joining a competitor, in one form or another. In relation to “other employment related restrictions” the Canadian authorities would have the power to make other regulations restricting employment terms that, in their view, unreasonably restrict the ability of employees to engage in business or work etc. It is not clear how broad this second regulatory power would be or how it might be used.

The Global Trend

Generally, in development countries the trend has been a tightening of the limits on non-compete clauses. This trend is driven mainly by economic policy.  Non-competes are seen to restrain trade, suppress wages, reduce worker mobility and hinder innovation. In the main, countries are not applying total bans but instead placing conditions on enforceability.  

These conditions include:

  • Limited to the reasonable protection of legitimate business interests
  • Proportionate to that need for protection (length and geography) or within strict stated limitations
  • Compensation payable in some countries (e.g. 30 to 100% of salary). 

The global trends are not uniform:

  • Total bans: USA has attempted a near total Federal ban, which has so far failed. Rules are still State based. California and Minnesota have close to a total ban while other States have different levels of restrictions. The approach is case by case. India does not permit restrictive covenants at all under their labour code.
  • Restricted approach:  Europe generally permits non-competes, but they are increasingly tightly regulated. Permitted durations are shrinking and what counts as a legitimate business interest is more closely scrutinised. Countries such as France, Germany, Spain, and Italy all require payment of compensation to the restricted employee.           
  • Employer friendly: Some parts of Asia and the Middle East have a more liberal approach to non-competes, with little regulation.
Other Options to Protect Businesses

Employers are now more reliant on other ways to protect their interests, including:

  • Clauses that restrict solicitation of both the employees and clients/customers of the former employer
  • Strong confidentiality and trade secret protection
  • Garden leave options which keep the employee off grid for a period of time by keeping them employed at home.      
Canadian Exemptions

The Canadian proposals however have some helpful exemptions to the new limitations:

  • Restrictions agreed in connection with the sale or transfer of a business where the transferor becomes an employee of the transferee – a long-established principle
  • A CEO or a person who performs the function of a CEO
  • C-suite employees who are managers and report directly to the CEO.  
Best Advice

Employers should keep focus on the business protections they really need. A generic approach to employment contracts carries risk. For instance, there is little point in paying for a restriction if the former employee can do no harm to the business, especially when in some countries, the employer cannot waive the restriction to avoid the related compensation.    

Employers should expect the current trend to continue and keep close watch on rule developments.       

This is a high-level general update only. Legal advice should be obtained on specific circumstances.
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